Toronto-Dominion Bank and Royal Bank of Canada, the country’s two largest lenders, cut their prime lending rates, failing to fully match the Bank of Canada’s interest-rate reduction for the second time this year.
Toronto-Dominion was the first to react Wednesday after the Bank of Canada cut its overnight lending rate 25 basis points to 0.5 percent. The Toronto-based lender cut its prime 10 basis points to 2.75 percent. Royal Bank lowered its rate 15 basis points to 2.7 percent. Prime influences borrowing rates from variable mortgages to credit lines.
Banks won’t mirror the central bank’s reduction to guard against risky borrowers in a hot housing market and to protect net interest margins, the difference between what they pay for deposits and charge for loans, according to Peter Routledge, an analyst at National Bank of Canada in Toronto.
“The banks will go down by less than the rate, not just to protect net interest margins but also as a credit-risk management policy,” Routledge said in a phone interview.
Spokesmen from Canada’s other banks didn’t immediately comment or couldn’t immediately be reached for comment on whether they’d follow the central bank move.
Toronto-Dominion’s response, within 12 minutes of the Bank of Canada’s announcement, contrasts with the six days the largest lenders took to respond to a Jan. 21 cut from the Bank of Canada. Then, the banks opted for a 15 basis point reduction to prime.
“Similar to the January cut, we believe the Canadian banks may, once again, choose not to mirror exactly any potential downward movement by the Bank of Canada, alleviating some of the banks’ ongoing margin pressures,” Barclays Plc analyst John Aiken said Wednesday in a note to clients.